Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Companhia de Saneamento de Minas Gerais (BVMF:CSMG3) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Companhia de Saneamento de Minas Gerais, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = R$1.6b ÷ (R$14b - R$1.7b) (Based on the trailing twelve months to September 2023).

So, Companhia de Saneamento de Minas Gerais has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 10% it's much better.

Check out our latest analysis for Companhia de Saneamento de Minas Gerais

Above you can see how the current ROCE for Companhia de Saneamento de Minas Gerais compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Companhia de Saneamento de Minas Gerais .

How Are Returns Trending?

We like the trends that we're seeing from Companhia de Saneamento de Minas Gerais. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 26% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Companhia de Saneamento de Minas Gerais' ROCE

All in all, it's terrific to see that Companhia de Saneamento de Minas Gerais is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 66% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Companhia de Saneamento de Minas Gerais, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Companhia de Saneamento de Minas Gerais isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.